BMO Financial Group Reports Strong Fourth Quarter Results
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BMO Financial Group Reports Strong Fourth Quarter Results
Strong Net Income Reflects Good Revenue Growth, as BMO's Focus on
Customers is Yielding Results, and Effective Expense Management
Personal and Commercial Banking Canada Continues to Deliver Robust
Revenue and Net Income Growth and Improvement in Competitive Position
Tier 1 Capital Ratio Remains Strong, at 12.24%
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Financial Results Highlights:
Fourth Quarter 2009:
-Net income of $647 million, up $87 million or 16% from a year ago
-EPS(1) of $1.11 and cash EPS(2) of $1.13, both up $0.05 from
a year ago
-Revenue increased 6.3% and expenses were reduced by 2.2% from
a year ago
-Provision for credit losses of $386 million, down $79 million from a
year ago. There was a $150 million increase in the general allowance
last year and no change in the current quarter.
Fiscal 2009:
-Net income of $1,787 million, compared with $1,978 million a year ago
-EPS of $3.08 compared with $3.76 a year ago and cash EPS of $3.14
compared with $3.83 a year ago
-Income Before Credit Provisions and Income Taxes of $3.7 billion in
fiscal 2009, up from $3.3 billion a year ago
-Provision for credit losses of $1,603 million comprised of specific
provisions of $1,543 million and an increase in the general allowance
of $60 million, compared with a provision for credit losses of $1,330
million a year ago comprised of specific provisions of $1,070 million
and an increase in the general allowance of $260 million
-Adjusted cash EPS(2) of $4.02 after excluding certain capital markets
environment charges of $355 million after tax ($0.66 per share),
severance costs of $80 million after tax ($0.15 per share) in the
second quarter and an increase in the general allowance of $39
million after tax ($0.07 per share) in the third quarter
TORONTO, Nov. 24 /CNW/ - For the fourth quarter ended October 31, 2009, BMO Financial Group reported net income of $647 million or $1.11 per common share. Canadian personal and commercial banking reported strong results with net income of $394 million, up $70 million or 22% from a year ago.
Today, we announced a first-quarter 2010 dividend of $0.70 per common share, unchanged from the preceding quarter and reflective of an annual dividend of $2.80 per common share.
"Defining great customer experience means delivering in ways that are rooted in customer choice - with consistency at every interaction. It's a disciplined approach that, for us, is yielding results," said Bill Downe, President and Chief Executive Officer, BMO Financial Group. "Particularly during this past year, individuals and businesses needed to know that their banker would be there for them. BMO stood by its customers, listened, helped them make sense of the environment as it related to their individual circumstances and worked with them to make sure they were well- positioned for the recovery. By doing so, we also attracted new customers looking for a better banking experience.
"P&C Canada had another very good quarter, with $394 million of net income, up 22% from a year ago. Commercial banking continues to experience strong growth, with revenue up $55 million or 16%. Our market share for loans to small and medium-size businesses increased from the prior year. Our efforts to reach out to customers and help them save money and choose the best products for them are working. We have narrowed the gap to the industry leader on both personal and commercial loyalty scores relative to a year ago.
"BMO Capital Markets results for the quarter were strong. Although net income was in line with a year ago, in 2008 we benefited from significant income tax recoveries. There were improved corporate banking revenues and underwriting fees increased. In 2009, we saw very strong revenue growth, with relatively modest expense growth which reflected focused cost control. Net income for the year was up 49% to more than $1 billion.
"Private Client Group delivered good revenue growth in its business lines for the second consecutive quarter, reflective of improved equity markets and a continued focus on attracting new client assets. Net income was up strongly from a year ago, when results were affected by capital markets environment charges, and down somewhat from the third quarter which benefited from a recovery of prior periods' taxes. Our U.S. retail banking franchise saw net income consistent with the third quarter and up from a year ago. Our focus on new customer acquisitions, lending and deposit gathering is enhancing our reputation in the U.S. Midwest as a bank that is here to help.
"Our businesses gained strength over the course of 2009 as we have achieved strong revenue growth while keeping a firm grip on expenses. We maintained tight control over staffing levels and supplier costs while continuing to leverage opportunities for process simplification. We enter 2010 with strong capital and liquidity and the confidence of knowing that our consistent approach is turning customers into advocates. While we expect credit losses to remain elevated into 2010, we believe that we are well positioned for further growth as the economy improves," concluded Mr. Downe.
(1) All earnings per share (EPS) measures in this document refer to
diluted EPS unless specified otherwise.
(2) The adjustments that change results under generally accepted
accounting principles (GAAP) to cash results are outlined in the Non-
GAAP Measures section at the end of Management's Discussion and
Analysis (MD&A), where such non-GAAP measures and their closest GAAP
counterparts are outlined. Adjusted cash EPS is also a non-GAAP
measure; please see details in the Notable Items section and also the
GAAP and Related Non-GAAP Measures section.
Segment Overview
P&C Canada
Net income was a strong $394 million, up $70 million or 22% from a year ago. Revenue increased across each of our personal, commercial and cards businesses, led by volume growth across most products and improved net interest margin. There was particularly strong growth in personal and commercial deposits. Good revenue growth together with effective management of operating expenses, while investing for the future, has resulted in strong cash operating leverage of 8.7%.
Our strategy, of focusing on providing an excellent customer experience and improving productivity, is working. We have narrowed the gap to the industry leader on both personal and commercial loyalty scores relative to a year ago.
In personal banking, we focus on product offers that are consistent with our brand promises, such as BMO Smart Steps. Since the launch of this offer, more than 100,000 BMO customers have taken advantage of at least one of the steps we recommend to make more from their hard-earned money. The First Home Essentials kit, targeted to potential homebuyers and launched in November 2008, proved very popular and helpful to customers over the course of the past year. We continue to focus on expanding and upgrading our branch network in priority markets and on driving revenue growth and customer loyalty through effective use of our robust performance management system. In fiscal 2009, we opened 12 new branches, redeveloped 20 and closed two. We also closed 93 Instore branches, responding to our customers' preference for the full-service branches offering professional advice and relationship management capabilities, combined with the convenience of electronic banking channels.
In commercial banking, our goal is to become the bank of choice for businesses across Canada. We rank second in Canadian business market share. We are leveraging this success to grow revenues by having value-added conversations with our customers, offering them both business and personal solutions and delivering on a complete customer experience as a trusted advisor that meets all their financial needs.
In the cards business, we are the largest MasterCard issuer in Canada. We have simplified and enhanced our entire suite of credit card products by eliminating annual fees for 400,000 customers and doubling AIR MILES rewards for another 1.2 million customers, providing a best in class product offering for our customers. We are growing our cards business with prudent credit management and have a low credit loss rate relative to our peers.
Today, we announced that we have signed a definitive agreement to purchase the Diners Club North American franchise from Citigroup, a transaction that on completion will more than double BMO's corporate card business. The deal gives BMO exclusive rights to issue Diners Club cards to corporate and professional clients in the United States and Canada, and will add net receivables of almost US$1 billion. Diners Club is recognized around the world as a premier card program for employee Travel & Entertainment expense cards and the North American franchise also benefits from worldwide MasterCard acceptance. The acquisition will immediately enhance our competitive position by placing us among the top commercial card issuers in North America. The transaction, subject to satisfactory completion of certain closing conditions including regulatory approval, is anticipated to close before March 31, 2010.
P&C U.S. (all amounts in U.S. $)
Net income was $23 million, up $12 million from a year ago. Results benefited from reductions in integration costs and changes in the Visa litigation accrual. Higher levels of impaired loans and the costs of managing this portfolio have reduced net income in the quarter by $12 million (by $9 million a year ago).
Cash net income was $39 million, including a severance charge of $2.4 million after tax, on a basis that adjusts for the impact of impaired loans, integration costs and the Visa litigation accrual. This is in line with the last five quarters where cash net income on this basis had exceeded $40 million.
Deposits grew $1.5 billion or 7.7%. The deposit increase reflects our continued commitment to provide the right products and services for our customers. We have maintained our number two ranking for retail deposit market share in our Chicago area markets while network banks lost market share.
We are maintaining our focus on new customer acquisition in both the consumer and commercial businesses, while continuing to make loans and provide deposit services to our customers and prudently manage expenses. Mortgage originations have moderated in the quarter but remain strong with some growth in new home buyer activity. We continue to focus on the customer experience as reflected in our sustained high loyalty scores. Our retail net promoter score was 44 for 2009, compared with 42 in 2008, while the average scores of our large bank competitors declined. These efforts have positioned us well as we come out of the current economic downturn.
Given the economic environment in fiscal 2009 and its impact on our loan portfolios, we have strengthened our review and monitoring processes. We have also added expertise to our problem loan resolution teams to help our customers and to ensure effective management of our exposures.
Private Client Group (PCG)
Net income in the fourth quarter increased $26 million or 32% from the same quarter a year ago to $110 million. Results a year ago included charges of $31 million ($19 million) after tax associated with the decision to purchase certain holdings from our U.S. clients in the difficult market environment. The BMO Life Assurance acquisition increased net income by $9 million. Revenues were lower in the brokerage businesses but effective expense control contributed to improved results.
Net income for the quarter decreased $10 million from the third quarter. Results in the prior quarter included a $23 million recovery of prior periods' income taxes. Our lines of business achieved good revenue growth for the second consecutive quarter, as we remain focused on continuing to deliver the high level of service and advice that our clients expect, especially in the current economic environment.
PCG net income excluding the insurance business was $69 million, up $16 million or 29% from the third quarter. Revenue grew by 6.1% as there was continued improvement in equity markets and we maintained our focus on attracting new client assets. Assets under management and administration improved by $9 billion or 3.7%.
Net income in the insurance business was $41 million, a decrease of $26 million from the third quarter due primarily to that quarter's $23 million recovery of income taxes.
PCG announced the expansion of the exchange traded fund (ETF) product suite by launching nine new funds to offer a total of 13 funds. The ETF product line is part of our commitment to providing our clients with the most diverse group of products and solutions, and the best education and support in the field of investments, a testament to our dedication to helping clients make sense of their finances. BMO remains the only major Canadian financial institution to offer a family of these low-cost, easy-to-understand, risk- diversifying investment products.
The Globe and Mail ranked BMO InvestorLine best of the bank- owned brokerages in its 2009 online brokerage rankings.
BMO Capital Markets
Net income for the quarter was $289 million, in line with the prior year. However, results a year ago benefited from a $52 million recovery of prior periods' income taxes and a higher proportion of tax-exempt revenue. In this quarter, there were no capital markets environment charges. The prior year included largely offsetting gains and losses with respect to the capital markets environment.
Revenue for the quarter increased $172 million from a year ago to $894 million. Corporate banking revenues increased significantly primarily as a result of higher lending fees and higher net interest income. Equity and debt underwriting fees were also up from the prior year. Trading revenues were down from a year ago and investment securities gains increased.
To better serve clients with a more focused and integrated capital markets business, on November 16, 2009, we announced our definitive agreement with Paloma Securities, L.L.C to hire its securities lending team and acquire assets used in the securities lending business of Paloma Securities. The addition of this team will allow BMO Capital Markets to increase the scope of our existing North American securities lending operations. The transaction, which is subject to regulatory approval, is expected to close in mid- December.
Our continued commitment to our clients is being noticed. During the quarter, BMO Capital Markets received the best FX Bank Canadian Dollar award from FX Week in their annual rankings and was named the best foreign exchange bank in Canada by European CEO magazine. We also achieved the top market share and research quality rankings in the Canadian Fixed Income annual survey conducted by Greenwich Associates, an independent research firm.
BMO Capital Markets was involved in 131 new issues in the quarter including 25 corporate debt and 27 government debt deals, eight issues of preferred shares and 71 common equity transactions, raising $45.8 billion, down $4.8 billion from the previous quarter.
Corporate Services
The net loss was $171 million for the quarter, with approximately two-thirds due to provisions for credit losses and the balance to low revenue. The net loss improved appreciably from the third quarter. There was a significant improvement in revenue and provisions for credit losses were better compared to the third quarter.
The net loss of $171 million in the quarter, compared with a net loss of $150 million in the prior year. Reduced revenues were partially offset by lower provisions for credit losses. Net interest income and net income have improved in Corporate Services in each quarter of 2009 due in part to management actions and more stable market conditions.
BMO employs a methodology for segmented reporting purposes whereby expected credit losses are charged to the operating groups quarterly based on their share of expected credit losses. The difference between quarterly charges based on expected losses and required quarterly provisions based on actual losses, as well as changes in the general allowance are charged (or credited) to Corporate Services.
Caution
The foregoing sections contain forward-looking statements. Please see the Caution Regarding Forward-Looking Statements.
Medium-Term Performance Targets
BMO has medium-term objectives of, over time, increasing EPS by an average of 10% per year, earning average ROE of between 17% and 20%, achieving average annual cash operating leverage of at least 2 percentage points, and maintaining a strong regulatory capital position.
Management's Discussion and Analysis
MD&A commentary is as of November 24, 2009. Unless otherwise indicated, all amounts are in Canadian dollars and have been derived from financial statements prepared in accordance with Canadian generally accepted accounting principles (GAAP). The MD&A should be read in conjunction with the unaudited consolidated financial statements for the period ended October 31, 2009, included in this document, and the annual MD&A for the year ended October 31, 2008, included in BMO's 2008 Annual Report. The material that precedes this section comprises part of this MD&A.
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Bank of Montreal uses a unified branding approach that links all of the
organization's member companies. Bank of Montreal, together with its
subsidiaries, is known as BMO Financial Group. As such, in this document,
the names BMO and BMO Financial Group mean Bank of Montreal, together
with its subsidiaries.
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Summary Data
(Unaudited)
(Canadian $ in Increase Increase
millions, except (Decrease) (Decrease)
as noted) Q4-2009 vs. Q4-2008 vs. Q3-2009
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Net interest income 1,442 33 2% (24) (2%)
Non-interest revenue 1,547 143 10% 35 2%
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Revenue 2,989 176 6% 11 -
Specific provision for
credit losses 386 71 23% 29 8%
Increase in the general
allowance - (150) (100%) (60) (100%)
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Total provision for
credit losses 386 (79) (17%) (31) (7%)
Non-interest expense 1,779 (39) (2%) (94) (5%)
Provision for (recovery
of) income taxes 158 207 +100% 46 40%
Non-controlling interest
in subsidiaries 19 - - - -
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Net income 647 87 16% 90 16%
Amortization of
acquisition-related
intangible assets
(after tax)(1) 8 (2) (15%) (1) (11%)
Cash net income(2) 655 85 15% 89 16%
Earnings per share
- basic ($) 1.12 0.06 6% 0.15 15%
Earnings per share
- diluted ($) 1.11 0.05 5% 0.14 14%
Cash earnings per share
- diluted ($)(2) 1.13 0.05 5% 0.15 15%
Return on equity (ROE) 14.0% - 1.9%
Cash ROE(2) 14.2% (0.1%) 1.9%
Productivity ratio 59.5% (5.1%) (3.4%)
Cash productivity
ratio(2) 59.2% (5.0%) (3.3%)
Operating leverage 8.5% nm nm
Cash operating
leverage(2) 8.3% nm nm
Net interest margin
on earning assets 1.73% 0.02% (0.01%)
Effective tax rate 19.2% 28.4% 2.8%
Capital Ratios
Tier 1 Capital Ratio 12.24% 2.47% 0.53%
Total Capital Ratio 14.87% 2.70% 0.55%
Net income:
Personal and Commercial
Banking 419 83 25% 38 10%
P&C Canada 394 70 22% 38 11%
P&C U.S. 25 13 +100% - -
Private Client Group 110 26 32% (10) (7%)
BMO Capital Markets 289 (1) (1%) (54) (16%)
Corporate Services,
including Technology
and Operations (T&O) (171) (21) (14%) 116 41%
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BMO Financial Group
Net Income 647 87 16% 90 16%
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Increase
(Decrease)
vs.
Fiscal-2009 Fiscal-2008
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Net interest income 5,570 498 10%
Non-interest revenue 5,494 361 7%
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Revenue 11,064 859 8%
Specific provision for
credit losses 1,543 473 44%
Increase in the general
allowance 60 (200) (77%)
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Total provision for
credit losses 1,603 273 21%
Non-interest expense 7,381 487 7%
Provision for (recovery
of) income taxes 217 288 +100%
Non-controlling interest
in subsidiaries 76 2 3%
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Net income 1,787 (191) (10%)
Amortization of
acquisition-related
intangible assets
(after tax)(1) 35 - -
Cash net income(2) 1,822 (191) (10%)
Earnings per share
- basic ($) 3.09 (0.70) (18%)
Earnings per share
- diluted ($) 3.08 (0.68) (18%)
Cash earnings per share
- diluted ($)(2) 3.14 (0.69) (18%)
Return on equity (ROE) 9.9% (3.1%)
Cash ROE(2) 10.1% (3.2%)
Productivity ratio 66.7% (0.9%)
Cash productivity
ratio(2) 66.3% (0.8%)
Operating leverage 1.3% nm
Cash operating
leverage(2) 1.3% nm
Net interest margin
on earning assets 1.63% 0.08%
Effective tax rate 10.5% 14.0%
Capital Ratios
Tier 1 Capital Ratio 12.24% 2.47%
Total Capital Ratio 14.87% 2.70%
Net income:
Personal and Commercial
Banking 1,501 196 15%
P&C Canada 1,392 183 15%
P&C U.S. 109 13 14%
Private Client Group 381 (71) (16%)
BMO Capital Markets 1,060 349 49%
Corporate Services,
including Technology
and Operations (T&O) (1,155) (665) (+100%)
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BMO Financial Group
Net Income 1,787 (191) (10%)
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(1) The amortization of non-acquisition-related intangible assets is not
added back in the determination of BMO and the groups' cash net
income.
(2) These are non-GAAP amounts or non-GAAP measures. Please see the GAAP
and Related Non-GAAP Measures section at the end of the MD&A, which
outlines the use of non-GAAP measures in this document.
nm - not meaningful.
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Management's Responsibility for Financial Information
BMO's 2009 Annual Report will contain a statement signed by the President & Chief Executive Officer (CEO) and the Chief Financial Officer (CFO) outlining management's responsibility for financial information contained in the report. In addition, BMO's CEO and CFO are expecting to sign certifications relating to the appropriateness of the financial disclosures in our annual filings and the design and effectiveness of our disclosure controls and procedures and internal control over financial reporting.
BMO's internal control over financial reporting includes policies and procedures that: pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of BMO; provide reasonable assurance that transactions are recorded as necessary to permit preparation of the financial statements in accordance with Canadian generally accepted accounting principles and the requirements of the Securities and Exchange Commission in the United States, as applicable; ensure receipts and expenditures of BMO are being made only in accordance with authorizations of management and directors of BMO; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of BMO's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements. Further, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
There were no changes in our internal control over financial reporting in fiscal 2009 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. BMO Financial Group's management, under the supervision of the CEO and CFO, has evaluated the effectiveness of our internal control over financial reporting using the framework and criteria established in Internal Control - Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management is expecting to conclude that internal control over financial reporting was effective as of October 31, 2009.
BMO will file the applicable CEO and CFO certifications with the Canadian Securities Administrators and the SEC in the United States in December 2009 when we file our Annual Report and other annual disclosure documents.
As in prior quarters, BMO's audit committee reviewed this document, including the unaudited interim consolidated financial statements, and BMO's Board of Directors approved the document prior to its release.
A comprehensive discussion of our businesses, strategies and objectives can be found in Management's Discussion and Analysis in BMO's 2008 Annual Report, which can be accessed on our website at www.bmo.com/investorrelations. Readers are also encouraged to visit the site to view other quarterly financial information.
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Caution Regarding Forward-Looking Statements
Bank of Montreal's public communications often include written or oral forward-looking statements. Statements of this type are included in this document, and may be included in other filings with Canadian securities regulators or the U.S. Securities and Exchange Commission, or in other communications. All such statements are made pursuant to the safe harbour provisions of, and are intended to be forward-looking statements under, the United States Private Securities Litigation Reform Act of 1995 and any applicable Canadian securities legislation. Forward-looking statements may involve, but are not limited to, comments with respect to our objectives and priorities for 2009 and beyond, our strategies or future actions, our targets, expectations for our financial condition or share price, and the results of or outlook for our operations or for the Canadian and U.S. economies.
By their nature, forward-looking statements require us to make assumptions and are subject to inherent risks and uncertainties. There is significant risk that predictions, forecasts, conclusions or projections will not prove to be accurate, that our assumptions may not be correct and that actual results may differ materially from such predictions, forecasts, conclusions or projections. We caution readers of this document not to place undue reliance on our forward-looking statements as a number of factors could cause actual future results, conditions, actions or events to differ materially from the targets, expectations, estimates or intentions expressed in the forward-looking statements.
The future outcomes that relate to forward-looking statements may be influenced by many factors, including but not limited to: general economic and market conditions in the countries in which we operate; interest rate and currency value fluctuations; changes in monetary policy; the degree of competition in the geographic and business areas in which we operate; changes in laws; judicial or regulatory proceedings; the accuracy and completeness of the information we obtain with respect to our customers and counterparties; our ability to execute our strategic plans and to complete and integrate acquisitions; critical accounting estimates; operational and infrastructure risks; general political conditions; global capital market activities; the possible effects on our business of war or terrorist activities; disease or illness that impacts on local, national or international economies; disruptions to public infrastructure, such as transportation, communications, power or water supply; and technological changes.
We caution that the foregoing list is not exhaustive of all possible factors. Other factors could adversely affect our results. For more information, please see the discussion on pages 30 and 31 of the BMO 2008 Annual Report, which outlines in detail certain key factors that may affect our future results. When relying on forward- looking statements to make decisions with respect to Bank of Montreal, investors and others should carefully consider these factors, as well as other uncertainties and potential events, and the inherent uncertainty of forward-looking statements. Bank of Montreal does not undertake to update any forward-looking statement, whether written or oral, that may be made, from time to time, by the organization or on its behalf, except as required by law. The forward-looking information contained in this document is presented for the purpose of assisting our shareholders in understanding our financial position as at and for the periods ended on the dates presented and our strategic priorities and objectives, and may not be appropriate for other purposes.
Assumptions about the level of asset sales, expected asset sale prices, net funding cost, credit quality and risk of default and losses on default of the underlying assets of the structured investment vehicles were material factors we considered when establishing our expectations regarding the structured investment vehicles discussed in this document, including the amount to be drawn under the BMO liquidity facilities and the expectation that the first-loss protection provided by the subordinate capital notes will exceed future losses. Key assumptions included that assets would continue to be sold with a view to reducing the size of the structured investment vehicles, under various asset price scenarios, and that the level of defaults and losses will be consistent with the credit quality of the underlying assets and our current expectations regarding challenging market conditions continuing.
Assumptions about the level of defaults and losses on defaults were material factors we considered when establishing our expectation of the future performance of the transactions that Apex Trust has entered into. Key assumptions included that the level of defaults and losses on defaults would be consistent with historical experience. Material factors that were taken into account when establishing our expectations of the future risk of credit losses in Apex Trust and risk of loss to BMO included industry diversification in the portfolio, initial credit quality by portfolio, the first- loss protection incorporated into the structure and the hedges that BMO has entered into.
Assumptions about the performance of the Canadian and U.S. economies as well as overall market conditions and their combined effect on the bank's business, including those described under the heading Economic Outlook, are material factors we consider when determining our strategic priorities, objectives and expectations for our business. In determining our expectations for economic growth, both broadly and in the financial services sector, we primarily consider historical economic data provided by the Canadian and U.S. governments and their agencies.
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Regulatory Filings
Our continuous disclosure materials, including our interim filings, annual MD&A and audited consolidated financial statements, our Annual Information Form and the Notice of Annual Meeting of Shareholders and Proxy Circular are available on our website at www.bmo.com/investorrelations, on the Canadian Securities Administrators' website at www.sedar.com and on the EDGAR section of the SEC's website at www.sec.gov. We expect to file our fiscal 2009 year end continuous disclosure materials on or about December 14, 2009.
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Economic Outlook
The Canadian economy has likely emerged from recession, with domestic-led growth more than offsetting weakness in exports. Consumer spending has trended moderately higher since the spring in response to record-low interest rates, with auto sales almost returning to pre-recession levels. Housing markets have fully recovered from last year's slump in sales and prices amid improved affordability. Supported by continued low interest rates, domestic demand should continue to expand in 2010, sustaining growth in personal credit and residential mortgages. However, business investment and loan growth will likely lag the recovery given low rates of capacity utilization and continued weakness in exports in the face of a strong Canadian dollar and soft U.S. demand. The unemployment rate is expected to decline next year as the recovery gains strength. However, the excess capacity in the economy should keep inflation low and, together with a strong currency, encourage the Bank of Canada to hold overnight interest rates steady until next summer. Firmer commodity prices should strengthen the Canadian dollar, lifting it above parity with the U.S. dollar in 2010.
The U.S. economy is recovering from its worst downturn in seven decades, with growth resuming as a result of expansive monetary and fiscal policies. Housing markets have stabilized in response to record affordability and tax incentives for first-time home buyers. Consumer spending has turned up modestly, but will likely remain soft in the face of high rates of joblessness and elevated debt levels, restraining personal loan demand. Business investment has started to improve, though it will likely remain constrained by excess capacity, restricting loan growth. The unemployment rate is projected to hover near a quarter-century high of 10% in 2010. To promote a durable recovery, the Federal Reserve is expected to hold overnight rates near zero until next September. Certain capital markets activities should continue to strengthen as credit markets and the economy improve.
This Economic Outlook section contains forward-looking statements. Please see the Caution Regarding Forward-Looking Statements.
Effects of the Capital Markets Environment on Fourth Quarter Results
No charges in respect of the capital markets environment have been designated as notable items this quarter in light of the relative insignificance of the amounts.
Further details are provided in the Financial Instruments in the Difficult Credit Environment section and in the BMO Capital Markets section.
Foreign Exchange
The Canadian dollar equivalents of BMO's U.S. dollar-denominated net income, revenues, expenses, provisions for credit losses and income taxes were decreased relative to the fourth quarter of 2008 and third quarter of 2009 by the weakening of the U.S. dollar. The average Canadian/U.S. dollar exchange rate in the fourth quarter, expressed in terms of the Canadian dollar cost of a U.S. dollar, fell by 3% from a year ago and by 2% from the average of the third quarter. Over the course of fiscal 2009, the U.S. dollar strengthened relative to the Canadian dollar, raising the Canadian dollar equivalents of BMO's U.S. dollar-denominated net income, revenues, expenses, provisions for credit losses and income taxes relative to fiscal 2008. The following table indicates the relevant average Canadian/U.S. dollar exchange rates and the impact of changes in the rates.
Effects of U.S. Dollar Exchange Rate Fluctuations on BMO's Results
Q4-2009 Fiscal-
---------------- 2009 vs
vs. vs. Fiscal-
(Canadian $ in millions, except as noted) Q4-2008 Q3-2009 2008
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Canadian/U.S. dollar exchange rate (average)
Current period 1.0827 1.0827 1.1648
Prior period 1.1107 1.1102 1.0321
Increased (decreased) revenue (20) (20) 363
Decreased (increased) expense 12 12 (216)
Decreased (increased) provision for
credit losses 6 6 (125)
Decreased (increased) income taxes (1) (1) 24
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Increased (decreased) net income (3) (3) 46
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At the start of each quarter, BMO assesses whether to enter into hedging transactions that are expected to partially offset the pre- tax effects of exchange rate fluctuations in the quarter on our expected U.S. dollar-denominated net income for that quarter. As such, the hedging activities partially mitigate the impact of exchange rate fluctuations within a single quarter; however, the hedging transactions are not designed to offset the impact of year- over-year or quarter-over-quarter fluctuations in exchange rates. The U.S. dollar strengthened in the first and second quarters, and weakened quite markedly over the course of the third quarter. The U.S. dollar strengthened modestly in the fourth quarter, as the exchange rate increased from Cdn$1.0775 per U.S. dollar at July 31, 2009 to an average of Cdn$1.0827 in the fourth quarter. Hedging transactions lowered pre-tax net income by $1 million for the quarter and $2 million for the year. The gain or loss from hedging transactions in future periods will be determined by both future currency fluctuations and the amount of underlying future hedging transactions, since the transactions are entered into each quarter in relation to expected U.S. dollar-denominated net income for the next three months.
The effect of currency fluctuations on our investments in foreign operations is discussed in the Income Taxes section.
Other Value Measures
Net economic profit was $159 million in the current quarter (see the Non-GAAP Measures section), compared with $144 million in the fourth quarter of 2008 and $79 million in the third quarter.
The total shareholder return (TSR) on an investment in BMO common shares was 25.1% for the twelve months ended October 31, 2009. BMO's average annual TSR for the five-year period ended October 31, 2009 was 1.8%.
Net Income
Q4 2009 vs Q4 2008
Net income was $647 million for the fourth quarter of 2009, up $87 million or 16% from a year ago. Earnings per share were $1.11, compared with $1.06. No charges in respect of the capital markets environment have been designated as notable items this quarter in light of the relative insignificance of the amounts.
Results a year ago included notable items totalling $195 million ($125 million after tax) and were comprised of capital markets environment charges of $45 million ($27 million after tax) recorded in BMO Capital Markets and Private Client Group and a $150 million ($98 million after tax) increase in the general allowance for credit losses. The impact of those notable items was mitigated by a $73 million recovery of prior periods' income taxes. Notable items are summarized at the end of the MD&A.
Specific provisions for credit losses were $386 million, up $71 million from a year ago due to higher levels of impaired loans.
P&C Canada net income was a strong $394 million, up $70 million or 22%. There was volume growth across most products and improved net interest margin.
P&C U.S. net income increased by Cdn$13 million (by US$12 million) to Cdn$25 million. Results benefited from reductions in integration costs and changes in the Visa litigation accrual. Higher levels of impaired loans and the costs of managing this portfolio have reduced net income in the quarter by US$12 million (US$9 million a year ago). Cash net income was US$39 million, including a severance charge of US$2.4 million after tax, on a basis that adjusts for the impact of impaired loans, integration costs and the Visa litigation accrual. This was in line with the last five quarters where cash net income on this basis had exceeded US$40 million.
Private Client Group net income increased $26 million or 32%. Results a year ago included a charge of $31 million ($19 million after tax) associated with the decision to purchase certain holdings from our U.S. clients. The BMO Life Assurance acquisition increased net income in the current quarter by $9 million while there were lower revenues in our brokerage businesses as well as lower expenses, due to active expense management.
BMO Capital Markets net income was in line with the prior year. Results a year ago benefited from a $52 million recovery of prior periods' income taxes. They also reflected a net $14 million ($8 million after tax) of charges in respect of the capital markets environment. The prior year's tax rate was also lowered by a higher proportion of tax-exempt income. Revenues rose $172 million or 24% due to higher corporate banking revenue and underwriting fees.
Corporate Services net loss increased $21 million or 14% from a year ago due to reduced revenues, offset in part by lower provisions for credit losses mainly as a result of a $150 million increase in the general allowance a year ago. The decline in revenues primarily related to lower mark-to-market gains on hedging activities than in the prior year, the impact of credit card securitizations completed in the latter part of 2008 and lower one-time securitization gains than in 2008.
Q4 2009 vs Q3 2009
Net income increased $90 million or 16%. Results in the third quarter were reduced by a $60 million ($39 million after tax) increase in the general allowance for credit losses, as summarized in the Notable Items section.
In P&C Canada, net income increased $38 million or 11%. Revenue rose $32 million or 2.3%, driven by volume growth and an improved net interest margin. Expenses fell $28 million or 3.7% due to lower capital taxes and lower severance costs.
P&C U.S. net income of US$23 million was consistent with last quarter. Revenue was up primarily due to improved loan spreads and the impact of more days in the current quarter. Expenses increased largely due to higher marketing and severance costs. Cash net income was US$39 million, including a severance charge of US$2.4 million after tax, on a basis that adjusts for the impact of impaired loans, integration costs and the Visa litigation accrual. On a comparably- adjusted basis, cash net income was in line with last quarter.
Private Client Group net income decreased $10 million or 7.4% as the third quarter benefited from a $23 million recovery of prior periods' income taxes. Revenue increased $24 million or 4.7% due primarily to higher fee-based and commission revenue in Full- Service Investing and higher fee-based revenue in mutual funds on increased client assets. Non-interest expense increased $4 million or 0.9% primarily due to higher revenue-based costs.
BMO Capital Markets net income decreased $54 million or 16% from the third quarter, which was an exceptionally strong quarter. The quarter benefited from increased fees from mergers and acquisitions and equity underwriting, although they were offset by lower trading revenues and debt underwriting fees. Lower net interest income was due to reduced corporate banking and trading net interest income and lower revenues from our interest-rate-sensitive businesses.
Corporate Services net loss improved by $116 million from the third quarter. There were higher revenues due to mark-to-market gains on hedging activities compared to losses in the prior quarter and, as a result of management actions and a more stable market environment, a lower negative carry on certain asset-liability interest rate positions and a reduced cost of carry on previous quarters funding activities that were undertaken to enhance our strong liquidity position. There were lower provisions for credit losses, mainly due to a $60 million increase in the general allowance in the third quarter.
Fiscal 2009 vs Fiscal 2008
Net income decreased $191 million or 9.7% to $1,787 million. Net income for fiscal 2009 was lowered by a net $474 million after tax of notable items, comprised of $521 million ($355 million after tax) of certain charges related to the capital markets environment, $118 million ($80 million after tax) of severance costs and a $60 million ($39 million after tax) increase in the general allowance for credit losses. Net income in fiscal 2008 was lowered by notable items totalling $426 million after tax, comprised of $388 million ($260 million after tax) of certain capital markets environment charges and a $260 million ($166 million after tax) increase in the general allowance for credit losses. Fiscal 2009 had good revenue growth and effective expense control, but these increases were more than offset by increased provisions for credit losses and higher income taxes.
In P&C Canada, net income increased $183 million or 15%. Revenue increased $385 million or 7.9% driven by volume growth across most products, an improved net interest margin, higher cards and payment service revenue and higher activity fees, partially offset by lower revenue from securitizations and mutual fund products. Expenses increased $107 million or 3.9% primarily due to increases in employee benefit costs, performance-based compensation, occupancy costs and payment services costs, partially offset by lower initiatives spending and savings from lower staff levels.
P&C U.S. net income decreased US$1 million or 0.6%. The impact of impaired loans reduced net income by US$46 million in 2009 compared to US$22 million in 2008. Revenue increased US$14 million or 1.5% and non-interest expense decreased US$4 million or 0.6%. On a basis that adjusts for the impact of impaired loans, integration costs, the Visa litigation accrual and last year's gain on the sale of a portion of our investment in Visa, cash net income was US$162 million and increased US$13 million or 8.7% versus last year. On a similarly-adjusted basis, revenue increased US$81 million or 8.7% reflecting strong deposit generation, a full year of our Wisconsin acquisitions (US$33 million) and increased gains on the sale of mortgages. Expenses increased US$38 million or 5.3% largely reflecting a full year of our Wisconsin acquisitions (US$26 million).
Private Client Group net income decreased $71 million or 16% from fiscal 2008, reflective of challenging equity markets and a low interest rate environment. Charges associated with the decision to purchase certain holdings from our U.S. clients in the difficult environment were lower by $8 million after tax in 2009. Results in 2009 also benefited from the $23 million recovery of prior periods' income taxes and the BMO Life Assurance acquisition.
BMO Capital Markets net income increased $349 million or 49% to $1,060 million. Results for 2009 were affected by charges of $355 million after tax related to the capital markets environment. Results in 2008 were affected by charges of $260 million after tax. Improved performance was attributable to significantly increased trading revenues and corporate banking revenues. Revenues from our interest-rate-sensitive businesses also performed very well in the first half of the year, as we took advantage of market opportunities.
Corporate Services net loss rose $665 million from a year ago to $1,155 million, driven in large part by lower revenues, higher provisions for credit losses due to our expected loss provisioning methodology, net of a lower general allowance recorded in 2009, and higher severance costs. The lower revenues primarily relate to a negative carry on certain asset-liability interest rate positions as a result of changes in market interest rates, the impact of funding activities that were undertaken to enhance our strong liquidity position, mark-to-market losses on hedging activities compared to gains in the prior year and the impact of credit card securitizations completed in 2008.
Revenue
BMO analyzes consolidated revenues on a GAAP basis. However, like many banks, BMO analyzes revenue of its operating groups and associated ratios computed using revenue on a taxable equivalent basis (teb). This basis includes an adjustment that increases GAAP revenues and the GAAP provision for income taxes by an amount that would raise revenues on certain tax-exempt securities to a level equivalent to amounts that would incur tax at the statutory rate. The offset to the group teb adjustments is reflected in Corporate Services revenues and income tax provisions.
Total revenue in the current quarter increased $176 million or 6.3% from a year ago to $2.99 billion. There was good growth in all of the operating groups and a reduction in Corporate Services. Revenue increased $11 million or 0.4% from the third quarter. Revenue for fiscal 2009 increased $859 million or 8.4% to $11.1 billion.
The weaker U.S. dollar in the current quarter decreased revenue growth by $20 million or 0.6% from the third quarter and by $20 million or 0.7% from a year ago. The U.S. dollar was stronger, on average, over the course of fiscal 2009 and increased revenue growth by $363 million or 3.5% year over year. Changes in net interest income and non-interest revenue are reviewed in the sections that follow.
Net Interest Income
Net interest income in the current quarter increased $33 million or 2.4% from a year ago. BMO's overall net interest margin improved 2 basis points, driven by P&C Canada due mainly to favourable prime rates relative to BA rates and actions to mitigate the impact of rising long-term funding costs. Average earning assets increased $3 billion or 1%, driven by Private Client Group as a result of the inclusion of BMO Life Assurance in 2009 and loan growth in Private Banking.
Relative to the third quarter, net interest income decreased $24 million or 1.6%. This was mostly driven by a reduction in average earning assets of $3 billion due to the weaker U.S. dollar. There were declines in BMO Capital Markets and P&C U.S., partially offset by growth in P&C Canada and Private Client Group.
In fiscal 2009, net interest income increased $498 million or 9.8%, driven by the growth in average earning assets of $15 billion with increases in all groups except P&C Canada which was affected by the securitization of low-margin mortgages and the planned runoff of the mortgage broker portfolio.
BMO's overall net interest margin on earning assets for the fourth quarter of 2009 was 1.73%, or 2 basis points higher than in the fourth quarter of the prior year and 1 basis point lower than in the third quarter. The main drivers of the change in total bank margin are the individual group margins, the change in the magnitude of each operating group's assets and the level of net interest income recorded in Corporate Services. The year-over-year increase of 2 basis points was mainly due to higher net interest margin in P&C Canada, partially offset by reduced net interest income in Corporate Services and the inclusion of BMO Life Assurance in Private Client Group in 2009.
Relative to a year ago, net interest margin was higher by 34 basis points in P&C Canada. The increase was driven by favourable prime rates relative to BA rates and actions to mitigate the impact of rising long-term funding costs, along with the impact of deposit growth outpacing loan growth and the securitization of low-margin mortgages. Those increases were partially offset by lower mortgage refinancing fees and interest received on tax refunds in the prior year. In P&C U.S., net interest margin improved by 26 basis points year over year due to strong deposit generation. Private Client Group net interest margin decreased by 188 basis points with approximately two-thirds due to BMO Life Assurance, which increased assets with no change to net interest income. The remaining decrease was due mainly to lower deposit income in the brokerage businesses as a result of lower spreads. BMO Capital Markets net interest margin fell 2 basis points from a year ago, with reductions in interest-rate-sensitive businesses partly offset by higher spreads in trading and corporate lending business.
P&C Canada net interest margin improved 5 basis points relative to the third quarter, mainly due to actions to mitigate the impact of rising long-term funding costs and higher volumes in more profitable products, partially offset by lower mortgage refinancing fees. Corporate Services net interest income improved relative to the third quarter, due in part to management actions and a more stable market environment, resulting in a lower negative carry on certain asset-liability interest rate positions and a reduced cost of carry on previous quarters funding activities that were undertaken to enhance our strong liquidity position. Relative to a year ago, Corporate Services net interest income declined slightly primarily due to the impact of credit card securitizations completed in the latter part of 2008.
In fiscal 2009, BMO's overall net interest margin rose 8 basis points. The increase was in part due to the impact of securitizing low-spread mortgages and deposit growth outpacing loan growth in P&C Canada. There were also higher spreads in corporate lending and interest-rate-sensitive businesses as well as increased trading net interest income in BMO Capital Markets. These increases were offset in large part by reduced net interest income in Corporate Services.
Net Interest Margin (teb)(x)
Increase
Increase Increase (Decrease)
(Decrease)(Decrease) vs.
vs. vs. Fiscal- Fiscal-
(In basis points) Q4-2009 Q4-2008 Q3-2009 2009 2008
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P&C Canada 322 34 5 313 29
P&C U.S. 326 26 13 312 12
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Personal and Commercial
Client Group 323 33 7 313 26
Private Client Group 291 (188) (2) 334 (144)
BMO Capital Markets 81 (2) (21) 100 31
Corporate Services,
including Technology and
Operations (T&O)(xx) nm nm nm nm nm
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Total BMO 173 2 (1) 163 8
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Total Canadian Retail(xxx) 321 19 4 317 21
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(x) Net interest margin is disclosed and computed with reference to
average earning assets, rather than total assets. This basis
provides a more relevant measure of margins and changes in margins.
Operating group margins are stated on a teb basis while total BMO
margin is stated on a GAAP basis.
(xx) Corporate Services net interest income is negative and lowers BMO's
overall net interest margin to a greater degree in 2009 than in
prior years.
(xxx) Total Canadian retail margin represents the net interest margin of
the combined Canadian business of P&C Canada and Private Client
Group.
nm - not meaningful
Non-Interest Revenue
Non-interest revenue increased $143 million or 10% from a year ago. The improvement was in part attributable to the prior year's $45 million of charges related to the capital markets environment as outlined in the Notable Items section. They comprised $228 million of charges in securities gains (losses) other than trading, a reduction of $30 million in other revenue and a $213 million increase in trading non-interest revenue.
There was strong growth in BMO Capital Markets primarily due to reduced investment securities charges. The group also benefited from higher lending and underwriting fees, offset by reduced trading revenues as the prior year had particularly strong interest rate and foreign exchange trading revenues. Private Client Group non- interest revenue also grew strongly, due to reduced charges associated with the decision to purchase certain holdings from our U.S. clients in the difficult market environment and the contribution from the BMO Life Assurance acquisition. In addition, there were higher insurance revenues, partially offset by lower mutual fund revenues.
Securitization revenues increased $34 million from the fourth quarter a year ago to $201 million, largely due to securitizing credit card loans. Revenues included gains of $21 million on the sale of loans for new securitizations, down $13 million from a year ago, and gains of $125 million on sales of loans to revolving securitization vehicles, up $27 million from a year ago. Securitizations have resulted in the recognition of less interest income ($173 million less) in the quarter, as well as reduced credit card fees ($123 million less) and lower provisions for credit losses ($53 million less). The combined impact of securitizing assets in the current and prior periods decreased pre-tax income in the current quarter by $42 million. We securitize loans primarily to obtain alternate sources of cost-effective funding. In the quarter, we securitized $798 million of residential mortgage loans. Securitizations are detailed in Note 4 to the unaudited consolidated financial statements.
Relative to the third quarter, non-interest revenue increased $35 million or 2.2%. There were increased non-interest revenues in all of the operating groups except BMO Capital Markets. Private Client Group non-interest revenue increased due to higher revenue in the brokerage businesses and higher fee-based revenue in mutual funds on increased client assets. Corporate Services non-interest revenues rose primarily due to mark-to-market gains on hedging activities compared to losses in the prior quarter. BMO Capital Markets non- interest revenue fell due to lower trading revenues, which decreased from the unusually high levels of the third quarter to more normal levels. This reduction was partially offset by lower investment securities losses and higher lending and mergers and acquisition fees.
In fiscal 2009, non-interest revenue increased $361 million or 7.0%. There was growth in P&C Canada due to higher revenue from the cards and payment services businesses and strong growth in BMO Capital Markets due to higher trading revenues. Private Client Group non-interest revenue decreased as there were reductions in securities commissions and fees as well as mutual fund revenues in the weaker equity markets environment. Corporate Services revenue was also lower, primarily due to mark-to-market losses on hedging activities compared to gains in the prior year, largely offset by higher securitization revenues.
Non-Interest Expense
Non-interest expense decreased $39 million or 2.2% from a year ago to $1,779 million. There were decreases in each of the groups except Private Client Group and Corporate Services, which both increased modestly. The weaker U.S. dollar reduced expense growth by $12 million or 0.7 percentage points, partially offset by higher expenses of $15 million from the impact of acquired businesses. Decreased expenses were reflected in lower salaries expense due to fewer staff, and reductions in computer costs, professional fees and capital taxes. Performance-based compensation was modestly higher and benefits costs increased.
Cash operating leverage was 8.3% in the current quarter.
Non-interest expense decreased $94 million or 5.0% from the third quarter. Performance-based compensation decreased $57 million. Computer costs were lower than in the third quarter. There were also lower capital taxes and deposit insurance costs as FDIC deposit insurance premiums were higher in the prior quarter primarily due to a special assessment. The weaker U.S. dollar reduced expense growth by $12 million or 0.6%.
In fiscal 2009, non-interest expense increased $487 million or 7.1% to $7,381 million. Close to two-thirds of the increase was attributable to the $216 million impact of the stronger U.S. dollar and the $109 million impact of operating and integration costs of new acquisitions. Expense growth was reflected in higher employee costs, premises and equipment, and deposit insurance premiums that are included in other expenses.
Cash operating leverage was 1.3% for fiscal 2009.
Risk Management
Financial markets continued to stabilize as key economic data is showing a recovery is underway. However, the labour market remains weak and will continue to impact credit quality. Commercial and Corporate Portfolios that continue to show particular pressure, include U.S. commercial real estate, forest products and manufacturing. We anticipate that provisions will remain elevated going forward and if the economic recovery continues, could show some improvement in the latter part of 2010.
Specific provisions for credit losses for the quarter totalled $386 million and there was no increase in the general allowance. Specific provisions totalled $357 million in the third quarter of 2009 and $315 million in the fourth quarter of 2008. Provisions totalled $465 million a year ago and $417 million in
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